Saturday, February 5, 2011
You may have heard something about these types of trusts. They all are the same thing; just different names for marketing purposes. For our purposes I will call them “IRA inheritance trusts.” The use of these trusts is gathering momentum by knowledgeable estate planning professionals. There is a clear reason for the increasing use of these trusts; and, that is, they are essential when planning for the safe financial future of one’s children and grandchildren. They are relatively new because of recent changes in IRS positions and state laws. Here’s why:
As more "baby boomers" are retiring and rolling over large 401(k) and other retirement plans to IRAs, proper tax and estate planning for IRAs have become increasingly important.
I have drafted a fair number of these IRA inheritance trusts over the last few years. The proper use of these trusts permits the IRA owner and his or her family to enjoy maximum “stretchout” and protection benefits at the same time. The protective features of certain “spendthrift trusts” have previously been tested and proven over many years of court decisions. And now, finally, the IRS has approved the income tax “stretchout” feature as well. This new stand-alone IRA beneficiary trust is not the “garden variety” that has existed for some time, but rather represents a huge breakthrough. State law changes have made these trusts even more special. The IRA inheritance trust is the most advanced “next generation” trust that solves many earlier, tricky drafting problems associated with maximizing both the stretchout and protection benefits.
Consider this: IRAs are where most people deposit their 401(k) funds, making them a major source of wealth. Often, an IRA is the single largest asset a family may possess. An IRA inheritance trust is the answer to the question, "What happens if I pass away before using my IRA?"
Often, when an heir inherits the proceeds of an IRA or other retirement plan, they withdraw all of the funds immediately. Once they withdraw these funds, they will be liable for income taxes on the entire amount of the IRA. Additionally, if an heir receives an IRA through an inheritance or beneficiary transfer, the proceeds of the IRA could be lost in a divorce, or subject to creditors.
An IRA inheritance trust will stretch the IRA over a long period of time, ensuring continued deferral of income taxes, protection against lawsuits, creditors and divorces, and maximizing the value of the IRA or retirement plan.